Bank of Montreal 2003 Annual Report Download - page 82

BMO Financial Group 186th Annual Report 200378
Notes to Consolidated Financial Statements
A continuity of our allowance for credit losses is as follows:
(Canadian $ in millions) Specific allowance General allowance Total
2003 2002 2001 2003 2002 2001 2003 2002 2001
Balance at beginning of year $ 769 $ 769 $ 517 $ 1,180 $ 1,180 $ 1,080 $ 1,949 $ 1,949 $ 1,597
Provision for credit losses 455 820 880 –– 100 455 820 980
Recoveries 88 68 40 ––– 88 68 40
Write-offs (566) (884) (698) ––– (566) (884) (698)
Foreign exchange and other (135) (4) 30 ––– (135) (4) 30
Balance at end of year $ 611 $ 769 $ 769 $ 1,180 $ 1,180 $ 1,180 $ 1,791 $ 1,949 $ 1,949
Comprised of: Loans $ 605 $ 769 $ 769 $ 1,180 $ 1,180 $ 1,180 $ 1,785 $ 1,949 $ 1,949
Other credit instruments 6 ––––– 6 ––
Summarized information related to various commitments is as follows:
(Canadian $ in millions) 2003 2002
Contract Risk-weighted Contract Risk-weighted
amount equivalent amount equivalent
Credit Instruments
Standby letters of credit and guarantees $ 11,170 $ 7,666 $ 11,902 $ 8,251
Securities lending 553 37 580 38
Documentary and commercial letters of credit 714 74 642 84
Commitments to extend credit
Original maturity of one year and under 67,200
– 72,723 –
Original maturity of over one year 21,655 10,596 21,765 9,787
Total $ 101,292 $ 18,373 $ 107,612 $ 18,160
Commitments to extend credit in respect of consumer instalment and credit card loans are excluded as the lines are revocable at our discretion.
We use other off-balance sheet credit instruments as a method of
meeting the financial needs of our customers. Summarized below
are the types of instruments that we use:
▪Standby letters of credit and guarantees represent our obligation
to make payments to third parties on behalf of our customers if
our customers are unable to make the required payments or meet
other contractual requirements;
▪Securities lending represents our credit exposure when we lend
our securities, or our customers’ securities, to third parties should
the securities borrower default on their redelivery obligation;
▪ Documentary and commercial letters of credit represent our agree-
ment to honour drafts presented by a third party upon completion
of specific activities; and
▪Commitments to extend credit represent our commitment to our
customers to grant them credit in the form of loans or other
financings for specific amounts and maturities, subject to meet-
ing certain conditions.
The contractual amount of our other credit instruments represents
the maximum undiscounted potential credit risk if the counterparty
does not perform according to the terms of the contract before
any amounts that could possibly be recovered under recourse or
collateralization provisions. A large majority of these commitments
expire without being drawn upon. As a result, the total contractual
amounts are not representative of our likely credit exposure or
liquidity requirements for these commitments.
The risk-weighted equivalent values of our other credit instru-
ments are determined based on the rules for capital adequacy of the
Superintendent of Financial Institutions Canada. The risk-weighted
equivalent value is used in the ongoing assessment of our capital
adequacy ratios.
Guarantees include contracts where we may be required to make
payments to a counterparty, based on changes in the value of an
asset, liability or equity security that the counterparty holds. In
addition, contracts under which we may be required to make pay-
ments if a third party fails to perform under the terms of a contract
and contracts under which we provide indirect guarantees of the
indebtedness of another party are considered guarantees.
In the normal course of business we enter into a variety of guar-
antees, the most significant of which are as follows:
Standby Letters of Credit and Guarantees
Standby letters of credit and guarantees, as discussed in Note 5,
are considered guarantees. The maximum amount payable under
standby letters of credit and guarantees was $11,170 million as at
October 31, 2003. Collateral requirements for standby letters of credit
and guarantees are consistent with our collateral requirements for
loans. In most cases, these commitments expire within three years
without being drawn upon. No amount has been included in our
Consolidated Balance Sheet as at October 31, 2003 related to these
standby letters of credit and guarantees.
Commitments to Extend Credit
Commitments to extend credit, as discussed in Note 5, include back -
stop liquidity facilities. Backstop liquidity facilities are provided to
asset-backed commercial paper programs administered by us and
third parties, as an alternative source of financing in the event that
such programs are unable to access commercial paper markets
or, in limited circumstances, when predetermined performance
measures of the financial assets owned by these programs are not
met. The terms of the backstop liquidity facilities do not require
us to advance money to these programs in the event of bankruptcy.
The maximum potential payments under these backstop liquidity
facilities were $36,560 million as at October 31, 2003. The facilities’
terms can be several years, but are generally no longer than one
Note 5 Other Credit Instruments
Note 6 Guarantees